Barclays Faces $800 Million UK Tax Avoidance Action

LONDON (AP) — Barclays PLC revealed Tuesday that it is the bank targeted by the British Treasury’s action to shut down two methods of avoiding tax, a change in the law that could cost the bank up to 500 million pounds ($800 million).Insisting that its methods complied with existing law, Barclays said it had voluntarily informed tax officials that it had repurchased some of its debt “in a tax-efficient manner.”

“Barclays also disclosed its participation in an authorised investment fund which is also legal and compliant with the tax code,” the bank said.

On Monday, the Treasury had described the two methods as “highly abusive” and intended to circumvent tax laws. It is drafting legislation to bar these arrangements retrospectively to Dec. 1.

“We do not take today’s action lightly, but the potential tax loss from this scheme and the history of previous abuse in this area mean that this is a circumstance where the decision to change the law with full retrospective effect is justified,” David Gauke, a senior Treasury official, said Monday.

The Treasury noted that Barclays was among the banks which had signed up to a code pledging that they would not indulge in tax avoidance.

The British government has said it could charge the bank more than 500 million pounds ($800 million) to make up for the unpaid tax, but the bank reportedly disputes the amount.

“Barclays respects the decision … to adjust the tax laws and will, of course, comply with the modified law once it is in place,” the bank said, adding that the change would not have a material impact on profit and would not require amendment of its preliminary results released on Feb. 10.

Barclays shares were fractionally lower at 243.35 pence in late morning trading.

Bruce Packard, analyst at Seymour Pierce, said the tax issue raises question on the investment case for Barclays.

“Barclays Capital has often been identified by market participants as one of the most aggressive tax structuring businesses, though the bank has never said how profitable this activity is,” Packard said.

“Secondly, (CEO) Bob Diamond has brought ‘citizenship’ right to the front of the chief executive’s statement. If the bank appears to be acting inconsistently with this citizenship message, management risks alienating retail customers, politicians and regulators.”

On Monday, another British bank, HSBC, disclosed in its annual report that it is involved in a dispute with U.K. tax authorities which could cost it $4.9 billion plus interest.

HSBC said the issue, covering the years from 2002 to 2009, involves shares in its Asian and certain European subsidiaries which are held by holding companies registered in the Netherlands. British tax authorities contend that dividends paid by the subsidiaries are subject to U.K. tax.

In another development Monday, HM Revenue and Customs announced that it would appoint a commissioner to review and possibly challenge tax settlements of more that 100 million pounds.

That decision came in response to criticism of the agency’s secretive dealings with companies including Vodafone and Goldman Sachs.

The House of Commons Public Accounts Committee in December criticised the agency for the way it handled large settlements, including cases in which the same officials negotiated and approved the settlements.

“The department has made matters worse by trying to avoid scrutiny of these settlements and has consistently failed to give straight answers to our questions about specific cases, which has severely hampered our ability to hold it to account for the settlements reached,” the committee reported.